Governance body flags issues with EC SME listing rules

February 25, 2022

The International Corporate Governance Network (ICGN) has raised concerns about the European Commission’s (EC) plan to improve access to financing for small and medium-sized enterprises (SMEs).

The commission is exploring changes to the EU’s listing rules to make it easier for SMEs to go public and make the bloc’s financial markets more attractive for companies in general.

The ICGN voiced support for these aims but highlighted the need for the EC to balance ease of access to financing with investor protections and stewardship.

The organisation warned that making listing in the EU more attractive “should not come at the expense of investors”, and that the proposals as they stood “may have the effect of watering down important shareholder rights and protections”.

In its official response to the commission’s consultation, the ICGN warned that efforts to reduce costs related to due diligence and compliance for listed companies could end up having the opposite effect due to lower standards. The organisation said that “there should be no balancing test applied that offsets the costs of going public with reducing investors’ information or rights to invest [in] the company”.

It also underscored the importance of the “one share, one vote” standard, opposing the idea of different share classes having different voting rights.

The EC has also proposed streamlining the reporting requirements for SMEs to reduce the costs related to required market updates such as annual and half-year reports.

However, the ICGN said any efforts in this direction should be “complemented by ensuring that investors have the quality of information they need on a timely basis”.

The organisation also highlighted special purpose acquisition companies (SPACs), given the record-breaking year for listings of this type in the US – and the rising level of interest in Europe.

The ICGN said it was concerned about poor transparency in SPAC listings, as well as a perceived “lack of strong governance practices”. It called for shareholder rights to be “factored in” to SPAC listing rules, adding: “Harmonisation amongst the EU could be an effective tool to attract global investors, who would be able to evaluate the conditions of the IPO or SPACs and determine whether the investment should be pursued.”

Surrounding concerns of poor transparency and lack of strong governance, this year the EU has begun implementing mandatory human rights due diligence, with legislation recently passing in both Germany and Norway. Wednesday this week, the EC released its long-awaited proposal for a directive on corporate sustainability due diligence, including human rights. Activist groups such as the Investor Alliance for Human Rights have welcomed the proposal, but warn against significant gaps that remain. For more details on this story, be sure to sign up for Minerva's weekly blog updates below.